A key strategic priority of the Government of India in recent years has been to increase financial services penetration among the country’s many unbanked citizens. Many of the unbanked live in remote rural areas where delivering financial services cheaply and effectively remains difficult. Despite the interest in expanding access in rural areas, policymakers still lack key information about state of financial access among the rural population. If researchers, policymakers and private institutions had better information about financial access in these areas, they could possibly design programs and products that would help improve the financial lives of the rural poor. CMF researchers set out to capture the status of financial services access through a rigorous household survey in rural Andhra Pradesh, a state that has seen considerable progress in the area of financial inclusion. Though numerous surveys have been conducted in the past, the present study, conducted in 2009 and 2010 is the first representative survey of a rural area to gauge access to microfinance.

Methodology
In choosing a sample from rural Andhra Pradesh, the researchers aimed to construct the most representative sample of the rural population of an entire state.

8 districts were selected from the 22 in Andhra Pradesh using stratified random sampling: The 22 districts in Andhra Pradesh were divided into four strata depending on certain criteria of the official poverty line and the proportion of adult women belonging to a microfinance group, and then two districts were chosen from each stratum using simple random sampling.

64 villages were chosen from the 8 districts using stratified random sampling: Each district was divided into four strata depending on the distance to the nearest bank branch or town. From each stratum two villages were chosen using simple random sampling.

1920 households were selected from the 64 villages: Researchers randomly selected 30 households from each village.

Findings

Savings
More than two-third of surveyed households have access to a formal savings account. Though this percentage is high, many of these accounts (approximately 41%) remain dormant (they contain only a balance of Rs. 0 or Rs. 50). Rural households opened most of these accounts in order to receive government benefits or to be eligible for a loan (79%) but rarely in order to save (only 14% opened accounts in order to save).

Despite RBI’s attempts to relax the Know Your Customer (KYC) requirements and remove procedural barriers to bank access, 49% of unbanked households reported not having documents or procedural difficulties as the reason for not opening a bank account. Also, a considerable percentage (28%) of our survey households reported lack of knowledge about banks and their products as a reason for not being a part of the formal banking system.

Lastly, the survey found that banked households tended to be better-off (measured by PPI) than unbanked households.

Borrowing
The study observed that overall indebtedness in rural Andhra Pradesh is high – about 93% of households had a loan outstanding at the time of survey. Informal borrowing is much more prevalent than formal borrowing, both in terms of overall debt and in terms of the percentage of households who had a loan outstanding from an informal source. Informal borrowing constituted about 75% of total debt held by surveyed households. More than 80 percent of households borrowed from informal sources while 50% of households had at least one loan from an SHG and about 11% from an MFI. About three-quarters of survey households had a member who belongs to an SHG.

Households used loans from different sources for different purposes. Household used a surprisingly high percentage of bank loans (58%) to buy agricultural inputs. Households used a significant percentage of SHG and MFI loans (50% and 32% respectively) to finance consumption and no more than 3% of any type of loan (SHG, MFI, bank) was used to start a new business, calling into question the claim that microcredit is regularly used for entrepreneurship.

A majority of our survey households had made non-routine expenditures in the six months before the survey. Many financed these expenditures by borrowing from informal sources, with 43% borrowing from friends or relatives, 13% from moneylenders and 11% from landlords or through their own income/savings (29%).

The most common reason for making a non-routine expenditure was health, which may explain why households borrowing largely from informal agents, who tend to be quicker and more flexible in disbursing cash.

The survey found that multiple borrowing was quite prevalent in rural Andhra Pradesh – about 84% of rural households had more than one loan outstanding at time of survey. Interestingly, this was primarily driven by informal borrowing, more than two-thirds (70%) of households had at least two loans outstanding from informal sources.

Lastly, researchers found that comparatively better-off families (as observed from the PPI scores) were more likely to borrow from multiple sources compared to families that were less well-off.

Insurance
The penetration of insurance coverage in rural Andhra Pradesh remains low – very few households have access to insurance products other than life insurance. Excluding life insurance and Arogyasri health insurance, less than 3% of rural households had access to formal insurance.

About 4.6% of surveyed households had received treatment through Arogyasri a state health insurance scheme for Below Poverty Line (BPL) households. However, the study found that even though the Arogyasri program was available only to BPL households, about 3% of beneficiaries did not have BPL cards, indicating possible leakage or corruption. Also, the program is designed to allow BPL families to access health care free of cost, but about 36% of surveyed beneficiaries who received treatment through Arogyasri had to pay for their medical treatment.

Policy Implications

– The fact that many households who have savings accounts do not use them and that a large fraction of unbanked households are unaware of banks suggests that there is still scope for banks in rural India to improve access through better marketing, awareness campaigns and product innovation. Policymakers should create incentives for savings account holders to use their accounts for savings, not simply for receiving loans or accessing government benefits. Additionally, banks should make it easier for rural households to open savings accounts by streamlining their bureaucratic processes and implementing relaxed KYC norms set out by the RBI.
– There is a huge gap between rural households’ demand for medical funds and its provision. Since many families finance non-routine health expenses by borrowing from informal sources, policymakers could create financial products that are specially designed to help families cope with health risks. State officials should do a better job of making sure that all households with a BPL card are able to access the state sponsored medical insurance program, Arogyasri, free of cost.
– Financial service providers and institutions should work on developing insurance products that could help the rural poor better cope with the risks that they face.